Ivan Pongracic

This dissertation examines the implications of the intra-firm Hayekian knowledge problem to the firms' internal administrative and managerial structures. My thesis is that decentralization of decision-making within firms is a response to the situation where employees hold economic knowledge superior to that held by the managers. Allowing employees to make their own decisions on how to use the resources of the firm by removing much of the hierarchical managerial structure gives the employees scope for entrepreneurial action and enables firms to utilize their employees' personal knowledge. This intra-firm decentralization and hierarchical flattening can work when employees are not motivated strictly by pecuniary interests. The more complex motivations can reduce the moral hazard problem in firms emphasized by much of New Institutional Economics. In addition, firms with decentralized decision-making rely on some form of intra-firm spontaneous order to coordinate the activities of their employees. The employees' mutual orientation is made possible by the firms' adoption of rules that facilitate an emergence of an organizational culture consisting of a shared set of intersubjective meanings. These elements of decentralized firms exist to a more limited extent in even the most hierarchical of firms, and therefore my analysis adds an important and heretofore overlooked component to the general theory of the firm.